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It’s Freight Bid Season Again

Posted by on in Freight Bids

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Shippers across North America are in the process of conducting their annual or mini freight bid exercises. What is in store for shippers and carriers this year?

This is a unique year. The supply/demand curve shifted during the early stages of Covid. Consumers transitioned to working from home, cut back on travel and dining out, spent their disposable dollars on durable goods and some moved away from their city residences. To meet the demand for increased freight transportation services, to move the increase in durable goods purchases, carriers boosted their purchases of fleet equipment. As this process was unfolding, governments sent out cheques to support citizens who lost their jobs during this period and kept interest rates low to stimulate the economy.

As Covid dissipated, consumers cut back on durable goods purchases and shifted some of their discretionary dollars back to travel, dining out, and entertainment. The net result of these market forces was surging inflation. Prices for food, gasoline, travel, dining out, mortgages and many other goods and services escalated. While the economy is not technically in a recession, rising prices created limitations on spending, as discretionary dollars were reduced. The bottom line for the Transportation Industry: There is now too much fleet capacity chasing too few shipments.

The so-called “freight recession” is manifesting itself in the financial results of publicly traded carriers and in the number of carrier failures. The demise of Yellow Freight, a major LTL carrier that has been in business for many decades and Convoy, a much talked about, digital freight broker, are among the thousands of companies that have left the industry this year.

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Shippers throughout North America are trying to cope with the tight freight capacity that has been driven by Covid-19, truck and driver shortages, freight embargoes and the surge in eCommerce activity. While many manufacturers and distributors conduct annual and bi-annual freight bids, this methodology is proving to be too static and rigid for shippers experiencing truck capacity shortages on certain corridors. Companies that rely on the spot market for carriers are likely experiencing rate spikes and inconsistent truck availability on an ongoing basis.

There are several solutions to address this problem. First, it is important for shippers to lock in capacity, market pricing and service commitments as part of their annual bidding process. As I have mentioned in prior blogs, these are opportunities to have “heart to heart” discussions with one’s core carriers. Certain carriers may be willing to sign multi-year agreements that provide their customers with “peace of mind” on key traffic lanes.

Second, despite these assurances, some carriers will not provide the expected capacity. They may not be able to retain or hire enough drivers to meet their commitments. In other cases, carriers will identify higher paying freight and divert their capacity to other customers. In other cases, they may wish to allocate some capacity to high-paying spot market loads. In these cases, shippers should have a mini bid methodology which they can quickly deploy to find replacement carriers.

In order to expeditiously go to market, companies should:

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In my previous blog (https://www.dantranscon.com/index.php/blog/entry/where-is-the-freight-transportation-industry-headed-in-2020), I outlined some of the forces shaping the freight transportation industry in 2020. This will likely be another year of upheaval.

In brief, the current “manufacturing recession” is restraining freight volumes. There will likely be a removal of a glut of fleet equipment. This coupled with the ELD compliance requirements in the US and Canada, and high insurance costs, may push out more poorly financed carriers. Political instability in the Middle East may drive up fuel costs. The maintenance of tariffs, even after the signing of the phase 1 China / US trade deal, will continue to drive up costs of supplies from China. This will likely make this a challenging year for shippers and carriers. It is very likely that shippers will face rising freight rates in 2020 to offset rising costs.

What can shippers do to restrain freight costs in 2020? Here are a few thoughts

1. Reevaluate your network and shipping practices

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Carrier costing models have evolved over the past couple of decades. Freight rates are based on the complete set of transportation-related processes at origin, in transit, and at destination, to serve each client. To effectively manage freight expenses, shippers must have a full understanding of all three elements.

Shippers with weak shipping order procedures and staging processes drive up the cost of freight transportation. Shipments that move at peak times, in congested areas, to remote areas, or on circuitous routes, drive up the cost of freight transportation. Consignees that disrupt or slow down the delivery process, that consistently extend a delivery beyond standard Hours of Service, that charge fines for late deliveries, have a significant negative impact on the financials of the shipper. What takes place during the pick-up and loading process is only part of the expense of moving freight in a cost-effective way. One of the biggest mistakes a shipper can make is to think that after they have selected high quality carriers, negotiated competitive freight rates, and trained their carriers on how to load their freight, their job is done. It isn’t.

The world of freight has changed. Hours of Service regulations coupled with the ELD implementation have increased the focus on driving and delivery windows. Strong economic conditions have created capacity shortages. Driver shortages have made capacity even tighter as carriers have had to park equipment across North America. Shippers and consignees with ineffective pick-up and delivery processes can increase the number of transit days beyond previous norms and raise costs. Shippers with chronically inefficient processes have been facing not only higher rates, but also a shortage of capacity. This can jeopardize customer retention, revenues and profits. What can shippers do to prevent this from happening?

Gain an Understanding of the Three Components of Freight Transportation for your Business

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In my last blog, I identified one of the recurring problems we encounter in working with shippers on a day to day basis, namely a lack of complete and accurate information on their freight transportation activities and expenses. I would argue that “you cannot manage what you cannot measure.” Good quality freight data is an essential component in the management of freight transportation.

Detailed, quality freight spend data can allow shippers to identify consolidation opportunities, to address chronic operational inefficiencies that result in excess or accessorial costs, to highlight “maverick” spend (e.g. higher cost carriers being used that are not listed in routing guide), to rectify the use of non-core carriers or more expensive modes and/or to create opportunities to construct more efficient routes and round trips. Shippers with poor quality and/or inaccurate freight cost data place themselves in a vulnerable position. Here are some steps that shippers can take to address this shortcoming and improve their profitability.

1. Build a Quality Freight Spend Data Base

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For the past 15 years, my colleagues and I have been working with shippers throughout North America to help them save money on freight transportation. In 2018, this cost has hit the radar screens of CEOs, as the tightness in freight capacity has placed upward pressure on freight rates. Many shippers have been experiencing rate increases in the high single digits and even double digits. Some CEOs have been highlighting the impact of freight costs during their quarterly investor calls and earnings reports.

A company’s freight costs often represent between two and ten percent of total revenues. For many companies in the manufacturing, distribution and retail sectors, their expenditures on freight have a direct and significant impact on their companies’ bottom lines.

Twelve years ago, I wrote a blog on this topic. In that blog, I identified one of the consistent problems we encounter in working with shippers on a day to day basis, namely a lack of complete and accurate information on their freight transportation activities. Twelve years later, this problem persists, and it is not limited to small companies. In fact, many companies with freight expenditures of five to fifty million dollars or more face the same problem.

“You can’t manage what you cannot measure.” Good quality freight data is an essential starting point in the management of freight transportation.

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One of the most frequent complaints I hear from carriers, in person, on social media, or at conferences, is about the number and quality of freight bids that they receive. Carriers complain about the poor quality of the data, the number of carriers in the bid, and about the lack of professionalism in the bid process. They also assert that if the shipper would just meet with them face to face, rather than through a bid process, the result would be more successful for both parties and would take a lot less time, money and effort.

My company has designed and executed many successful bids over the past fourteen years. We have learned that for many shippers, success comes from getting “your house in order” before executing the bid. This is what is involved.

Many shippers have been moving the same freight, to the same consignees, using the same processes, for several years. In their haste to put their freight out for bid, they overlook certain aspects of their business.

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The Basics

Freight Transportation is typically the single largest cost component of Supply Chain Management. Data from Logistics Management’s Annual Study of Logistics and Transportation Trends highlights that an average transportation spend is in the range of 10 to 11 percent of revenue for companies with less than $250 million in Sales and it is in the range of 2 to 3 percent for companies with revenues in excess of $9 billion. As a result, my colleagues and I are often amazed that freight expenses are undermanaged in so many companies.

Freight Expenses are Controllable, Manageable and Negotiable Costs

Regardless of mode, freight costs are typically comprised of three elements

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As we enter a New Year, many people create a set of resolutions to burn off a few pounds, to quit smoking or to achieve whatever goals are meaningful to them. On a professional level, this is a time for smart shippers to set in motion a series of resolutions to improve their company’s freight operations and their personal career trajectory. Here are a few to consider.

1. Follow the Donald . . . closely

President-elect Trump has promised to make a number of changes to both the domestic economic situation in the United States and to the current world order. As an individual who campaigned as an “outsider,” Donald Trump threatens to upend a range of current business practices. Keep a close eye on his trade policies, his efforts to boost manufacturing jobs in America, his government spending programs, his policies on climate change and on infrastructure spending. Initiatives in these areas would have an impact the flow of goods and services, on economic growth and on freight transportation.

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The first blog in this series looked at the money saving opportunities for organizations that take control of Inbound Transportation. This blog will outline a series of steps that need to be taken to make this happen.

A Commitment to Act

In the last blog, it was highlighted that some vendors place a mark-up on their outbound freight costs (viz. your company’s inbound freight expenses) and pass it on to their customers. It is important for every company that receives inbound freight to understand the following.

A trucking company adds a mark-up to their costs in order to come up with their freight rates. A freight broker and/or logistics service provider will take the carrier’s rate and add another mark-up. In other words, by the time you receive shipments from your vendors, they may have from two to four mark-ups added to the basic cost.

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b2ap3_thumbnail_dreamstime_xl_9421932.jpgManaging Inbound Freight is often overlooked or not optimally managed as an opportunity for cost savings in many companies. This is a conclusion we have come to after working with a range of companies and industries over the past 13 years. When we are invited to meet with a manufacturer or distributor of freight, the priority is usually finding cost savings on outbound freight, not inbound freight. This seems to be the result of several factors.

First, many companies are not able to determine how much they are paying for inbound freight. Freight costs are often embedded in the “landed cost” of the products; the actual freight cost component is not identified. Many companies have poor visibility into their inbound freight activity.

Second, some companies don’t care about their inbound freight costs. They take the landed cost of their inbound shipments and add a markup. They are satisfied with this approach.

Third, some companies are concerned about upsetting their vendors by asking them what they pay for freight. These companies may be very dependent on certain vendors for specific products and have a perception that by engaging in a dialogue on freight costs, an area that the vendor has historically managed on their own, this may encourage the vendor to give priority to other customers. In some situations there is the perception that because the vendor is a large company, they are able to negotiate better rates than the manufacturer receiving the goods.

Fourth, companies often have a Transportation or Logistics Manager who is responsible for outbound freight; inbound freight is managed, unmanaged or mismanaged separately by the purchasing/procurement department. Shippers who take charge of Inbound Freight Transportation can achieve savings in a number of areas.

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b2ap3_thumbnail_dreamstime_xl_31478542_20160826-151328_1.jpgDuring this period of modest economic growth and ample capacity, freight rates have been in decline. This is confirmed by the various market indices that track freight rates. Lower energy prices that have translated in lower fuel surcharges have also helped keep freight rates in check. The data also indicates that some shippers are switching modes and moving from intermodal back to highway service to obtain faster service at more attractive rates. Looking ahead to the future, 54 percent of the trucking companies responding to a recent Inbound Logistics survey expect static growth in the near term.

Despite the drop in freight rates, 75 percent of shippers surveyed in the same study stated that reducing transportation costs is their top priority while only 38 percent indicating that finding capacity is a challenge. The static economy and low energy prices would appear to be creating a “perfect storm” for shippers seeking to meet their greatest challenge. The danger for shippers is to get greedy as many did during the Great Recession. We remember seeing shippers bid their freight multiple times a year in the hope of continuing to drive lower freight costs. While we are big believers in the value of high quality freight bids, we are also a strong proponent of the old adage, “you get what you pay for.”

We all know that just as there are cycles in the stock market and the housing industry, there are cycles in the freight industry. What goes down will go up again. Shippers that surround themselves with “bottom feeder” carriers at discounted rates will likely have a rude awakening when the market turns. Moreover, with new government regulations coming into play and the volatility of fuel prices, capacity will likely tighten and freight rates may rise sooner than later.

So what should thoughtful shippers do to manage their freight costs as smartly as possible? As stated above, we still believe that conducting a professional freight bid exercise, once a year or every two years is a wise thing to do. For shippers that include a range of quality carriers and logistics service partners in the RFP and conduct multiple round events, this is still a great way to secure savings in freight costs.

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Back in the 90s, I had the privilege of leading Canada’s largest Intermodal Marketing Company. Since that time, I have been a big supporter of this service. In our consulting work with shippers, we are often struck by the fact that this service remains undervalued and underutilized. The purpose of this blog is to challenge shippers to revisit and rethink their company’s intermodal activity and help them craft an effective plan within their supply chain strategy.

While intermodal service provides various benefits, the top advantage is that on longer lengths of haul (i.e. over 1000 miles), it typically costs less than over the road truckload service. While transit times are longer in some (but not all) instances, the economies of moving multiple containers on an intermodal train usually provide shippers with a cost advantage. When compared to truck transport, lower fuel surcharges and less exposure to driver shortages are also beneficial.

Over the past decade, all of the class 1 railroads in North America have invested heavily in their Intermodal terminal network and service offerings. As an example, a few years ago, CN Rail built a rail facility in Prince Rupert, British Columbia, the closest North American port to Asia. That port allows for the movement of intermodal containers on a single-line CN train from Prince Rupert across Canada or through Chicago as far south as New Orleans, LA. Here are a few steps to consider in preparing an effective intermodal strategy.

Step 1 – Revisit your vendor and customer service requirements

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b2ap3_thumbnail_Sample-Routing-GuideV1_20160429-193844_1.jpgMany shippers don’t achieve the cost savings they expect from their freight bid exercises. This can happen despite the time, energy and costs that go into these projects. Based on our work with shippers over the past twelve years, these are the main reasons why this happens.

A Failure to Provide Full Disclosure of Requirements and Expectations

As a prelude to the execution of a freight bid, shippers are required to gather and document the scope of their freight transportation requirements. For carriers to bid properly on a shipper’s freight, this goes well beyond volumes, lanes and transit times. Carriers need to understand everything about the pick-up, linehaul and delivery operations. Unfortunately, this does not always happen. The omission of certain requirements can lead to erroneous carrier selections and turmoil after the bid has been completed and the freight has been awarded. Here is one example.

Some shippers require early morning (i.e. 7:30 AM) deliveries. Not all LTL carriers are able to supply this service in all locations on a consistent basis. If carriers are not informed of this requirement in the RFP and then expected to meet this requirement in certain locations after the bid has been awarded, this can lead to service failures and pressure to bring back the incumbent (s).

A Failure to Gain Buy-In and Support from all Divisions and Sister Companies

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b2ap3_thumbnail_dreamstime_xl_24936632.jpgOnce you gather the necessary data outlined in the previous blog (http://www.dantranscon.com/index.php/blog?view=entry&id=229 ), it is time to take action. Here is a set of steps to follow to save money on accessorial charges.

Set up a cross-functional team

As you will realize when you review your research notes, it will often take a number of parties (sales, production, and warehouse management) plus the customer in many cases and your carriers to address how to reduce accessorial charges. Once you assemble your cross-functional team, have a meeting to share and discuss your findings and create cost saving targets, action plans, persons accountable and timelines.

Create a report to track success on a monthly basis. Share the report with key stakeholders and follow up with any stakeholder who does not fulfill his/her responsibilities.

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A couple of weeks ago, I wrote a blog about the new pricing processes that LTL (and small parcel) carriers are employing to improve the profitability of their operations. I noted that freight carriers are emulating some of the activities that have been undertaken by the airlines such as dynamic pricing (i.e. adjusting rates based on time of day and day of the week) to increase yields on their freight activities.

Similar to the airlines, in recent years, LTL carriers have become more focused and aggressive in seeking payment for additional services (that have distinctive cost elements) that have been offered at no charge or at less than full cost recovery in the past. Many carriers have been focusing on inefficient shipper practices or administratively costly tasks that drive up their costs. They have been turning to their customers to compensate them.

In this blog, I will provide a set of questions that shippers should ask themselves and their customers to understand the current shipping processes that are precipitating accessorial charges and the costs that are being incurred. In the next blog, I will provide some general practices that shippers can employ to mitigate these costs.

Why do Accessorial Charges Exist?

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As everyone knows, it is very difficult to time the stock market. While we are all aware of the old adage, “buy low and sell high”, in reality, this is not easy to do.

When it comes to freight rates, it is sometimes problematic to select the right time to put a company’s freight out for bid. The last few years have been particularly challenging for shippers. After the Great Recession, carriers have been adding capacity in a prudent and deliberate way. Gone are the days when carriers build transport companies and hope that shippers will come. In addition to managing their fleet capacity, carriers have also been challenged with the struggle of recruiting qualified drivers.

Consolidation in the trucking industry has been very prevalent in recent years. In Canada, companies such as TransForce have acquired large chunks of the small parcel, LTL and truckload sectors. There are simply fewer carriers for a shipper to choose from. Carriers have gained pricing leverage over the past few years.

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b2ap3_thumbnail_dreamstime_l_20588089.jpgIn the last blog, I highlighted some of the opportunities that shippers miss out on to save money on freight when they don’t manage their freight spend data effectively. What steps can a shipper take to correct this situation? Here is a partial list.

• Utilize a Transportation Management (TMS) System. TMS systems have changed significantly over the past ten years. Shippers can now buy or lease a TMS system at a reasonable rate. For companies that don’t wish to make this investment, they can reap many of the benefits without making a capital investment by working with a logistics service provider that has a leading edge system.

• Make sure the company’s or LSP’s TMS system is capturing the key data elements on a daily basis that are needed to monitor freight expenditures. This includes complete and accurate commodity descriptions, actual weights and billed weights, capturing the various cost elements of their shipments individually such as the freight rate, fuel surcharge, currency exchange, accessorial charges, carrier name, origin and destination cities, state/province and postal codes/zip codes, ship date and arrival date.

• Sort the data in the following ways to help identify opportunities for improvement:

             By carrier – to reduce the company’s dependency and vulnerability in case of a strike or business failure and to leverage shipping volumes

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A company’s freight costs often represents between two and ten percent of total revenues. For many companies in the manufacturing, distribution and retail sectors, their freight spend has a direct impact on their bottom lines. Nine years ago I wrote a blog with the title above. In that blog, I identified one of the consistent problems we encounter in working with shippers on a day to day basis, namely a lack of complete and accurate information on their freight transportation activities.

Nine years later, this problem persists and it is not limited to just small companies. In fact, many companies with freight expenditures of five to fifty million dollars or more face the same problem.

The challenge now is that freight companies have figured out that if they use their scales and dimensioning devices, they can weigh and measure the freight they move more accurately. If shippers have poor practices that hinder the flow of their assets, they can calculate the cost of these deficiencies. They are now charging more aggressively for these additional costs and for the precise cubic space occupied by the freight. As a result, carriers can and are securing revenue that they may have missed in the past.

What is interesting is that some of these shippers have high quality ERP and accounting systems. However, when you try to extract a year’s worth of freight transportation data, you receive a file that is riddled with errors and omissions.

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Many manufacturers and retailers throughout North America spend millions of dollars a year on freight transportation. Freight costs can represent between 1 and 10 percent of a company’s operating revenue, one of the largest cost items.  They are often treated as a necessary evil. From time to time a shipper may try out a new mode of transport, a new carrier or conduct a freight bid. Other than that, freight programs tend to remain fairly static from year to year.

During our years of consulting with shippers all over North America, we have observed a pattern of Best Practices that elevate certain shippers and companies above their peers. Employing these Best Practices allows these companies to reduce freight costs and improve profitability. One of the best ways to find out where a company stands in the area of Freight Management is to conduct a Transportation Audit. It is our view that shippers with a freight budget in excess of $1 million should periodically conduct an independent audit of their freight programs. Just as businesses audit their accounting practices, looking for opportunities for improvement, Transportation departments should do so as well. You might be amazed at what you find.

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